China Film Group at 15: Moving the Biz Into the Future

China Film Group Corp. has been so closely involved with the development of the Chinese film industry throughout the past 15 years that it is difficult to separate the company from the actions of the government.

The distinction may become a degree or two clearer when the company, which is a wholly state-owned enterprise, finally floats its shares on the stock market. It will then become a private company, albeit one that is likely to still count the government as its majority owner.

The date for the planned IPO still remains uncertain but last week CFG filed a prospectus saying it is seeking to raise $740 million. The IPO will symbolically mark the end of a period when the state not only set the policy framework for the Chinese film industry, but also felt it necessary to lead it by example.
CFG had a predecessor, China Film Corp., that was established in the heat of revolutionary fervor in 1949. CFG itself was formed in 1999 through a process of consolidation and incorporation, in what was one of the first acts in the government-orchestrated process of film industry reform, modernization and privatization that accelerated through 2000-01.

CFG's main stated roles are to be in development and distribution. But in fact, it spans the whole industry chain from film production, distribution and exhibition through to technology development, operation of a movie channel (CCTV6) and facilitating overseas relations.

In 2012 CFG released 158 films, which is more than the next four distributors combined.

CFG has stakes (some majority, some minority) in six different cinema exhibition companies, giving it approximately 40% of China's theatrical B.O.

Through one subsidiary, CFG is the only company licensed to import foreign films, while through another it is required to be involved with all the country's co-productions. Most important, and sometimes controversially, CFG holds the sole license for theatrical release of films that enjoy revenue-sharing distribution deals.

That makes CFG the business partner of, and de facto sub licensee for, all the Hollywood studios. Quite simply, CFG is the locomotive that the Hollywood majors must hitch on to if they are to release movies into the massive and fast-expanding Chinese market.

Last year was also the year when CFG's relations with Hollywood distributors were tested by a dispute that saw CFG withhold the newly expanded share of box office revenues owed to the studios. CFG temporarily queried the application of a value added tax introduced as part of China's tax code and eventually agreed to make full payments. But the incident led to a curious business and political dance, in which the studios sought to pressure CFG for their missing millions, but had to do so gently and through diplomatic channels for fear of skirmishing with the country's monopoly revenue share distributor.

CFG by the Numbers - The digits swirling around China's biz grow exponentially every year: $3.57b box office in China in 2013; 158 films released by CFG in 2012; 71% Market share in 2013 of local films. Illustration by Raul Arias for Variety

For all that evident muscle, and the estimated 40% contribution that distribution makes to CFG's revenues, Han Sanping, the company's long-time chairman, often maintained that CFG's strength was more to be found in production.

Where previously the roles of many Chinese film studios was to produce propaganda films and create employment, CFG under Yang Buting and later Han was to lead a modernization process.

As a producer, CFG has been part of John Woo's two-part historical epic "Red Cliff," as well as Stephen Chow's effects-driven hit "CJ7." It was also the producer of "The Founding of a Republic" (2009) and "Beginning of the Great Revival" (2011), two patriotic films that were remarkable for being a throwback to propaganda, while also being genuinely popular with audiences. Han produced and directed the films as well.

Some in the industry question CFG's innate strength as a production company. They suggest that development is ad hoc, rather than systematic, and that its production slate is arrived at by relying on its partners to fuel its progress.

But time and again the company has proved adept at finding partners that allow it to keep moving forward.